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Wednesday, February 18, 2015

Parents should pay attention to the Fed

Since the crash, I've become a Fed watcher.

I don't like what I see.

I'd been thinking for a while now that I want to start alerting ktm readers to the Fed's importance in our children's lives, but that idea, along with a hundred other things I've been thinking I want to do, has been languishing in the want-to-do queue.

The reason Fed officials want to raise rates before everyone who is looking for a job finds one is that the Federal Reserve "fights inflation" by keeping people out of work. Keeping people out of work keeps wages down, et voilà. Inflation fought.

By law, of course, the Federal Reserve is required to promote "maximum employment."

But the Federal Reserve has never promoted "maximum employment" in the sense of full employment, "full" being the proper synonym for "maximum."

Instead, members of the FOMC interpret "maximum" to mean 'whatever we say it means.' Typically, they see maximum employment as being 5% unemployment. That's 5% at a minimum, mind you.Their estimates of the proper level of joblessness have ranged as high as >6%.

If members of the FOMC see unemployment falling below 5%, they "tighten."

Tightening works 100% of the time. The Federal Reserve can always, without fail, stop growth in employment.

How do Fed officials decide how low is too low?

Beats me.

They don't appear to consult history (the U.S. had full employment with stable inflation in the 1960s); they don't appear to consult the experience of other nations (Japan's unemployment rate has fallen to 3.5% and we're still reading tragic stories about low inflation there); and they seem to have learned nothing from the fact that their past opinions re:maximum employment have been wrong time and time again. (Have they ever been right?)

They do what they do.

That is the long and the short of it: the Federal Reserve fights inflation by fighting full employment. That is why parents need to pay attention.

Just to be clear, I'm not talking about the employment-to-population ratio, which is abysmal, though a lot better than it was. (77.2% for workers aged 25-54, compared to 79.2% before the crash. The low point since the crash was 74.9% in 2011.)

I'm talking about unemployed people who want to be employed and are looking for work.

The Federal Reserve consciously and intentionally sets policy to ensure that 5% of those looking for work won't find it.

Median starting wages of recent college graduates have not kept pace with median earnings for all workers over the past six years. This type of gap in wage growth also appeared after the 2001 recession and closed only late in the subsequent labor market recovery. However the wage gap in the current recovery is substantially larger and has lasted longer than in the past. The larger gap represents slow growth in starting salaries for graduates, rather than a shift in types of jobs, and reflects continued weakness in the demand for labor overall.

Be sure to check out the charts.

On a related subject, a while back I mentioned that I'd been wondering why it is that, when I was a child, my father, a farmer in central Illinois, could raise four children and send us all to college on one income.